Increasing equity market volatility will drive investors to seek steadier, more predictable returns from alternative asset classes in the New Year, according to Managing Partners Limited, the asset management company. 

The negative market reaction to the 25-basis-point cut to the discount rate by the Federal Reserve this month illustrated the growing weakness of market sentiment and extreme sensitivity to bad news. While property prices in the western world will stabilise from a reducing trend, the credit crunch will still make it difficult to borrow money and that will continue to hold the housing market back, impacting sentiment even further. 

 “Because the market is sensitive to bad news we shall see more volatility next year than we have had for some time. The prevalence of index tracker funds will only add to that volatility. For speculative investors that is good news but for cautious investors, such as pension funds that have a liability-driven investment approach, equity investment be become a greater challenge.”  

“Investors will still look for growth in emerging markets but they will also shift to alternative asset classes offering independence from equities and reasonable returns delivered in a smooth and predictable manner. For example, we will see more appetite for market neutral hedge funds that can control volatility as well as funds that invest in traded life policies.” 

Traded life policies (TLPs) are United States-issued life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime.  They are purchased at a discount from their maturity value, which in the majority of cases is fixed at outset, which means that they are guaranteed to rise in value.

The TLP market has seen huge growth from $50m in 1990 to $20bn in 2006. The financial market volatility seen this year has already helped investor appetite for TLPs to grow significantly. Research¹ by MPL shows that between November 2006 and October 2007, assets under management within an index of five high profile traded life policy funds  (TLPs) increased by a staggering 128.9%. The collective amount of money invested in these funds grew from £86.5 million to £198 million.  

 Since November 2006, Managing Partners Limited has seen an 185.65%% increase in the amount of money invested in its traded life policy funds.  It estimates that 75% of the money invested in its funds is from institutional investors, and 25% from retail investors. 

While TLPs carry the risk that it is unknown when the lives assured will die, the key attraction of a TLP fund is that with the right diversification and actuarial analysis, they can be used to deliver steady, predictable returns. Because of this high degree of certainty and their solid underlying value, it is possible for products that invest in them to secure a substantial degree of gearing to enhance returns and initial allocation rates.

This entry was posted on Wednesday, December 12th, 2007 at 12:35 pm and is filed under Managing Partners News. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.